Vesting Certificates: What do they do and why are they needed?

Zoe Stollard, Construction Partner at Browne Jacobson, discusses about Vesting Certificates and their purpose in the Construction Industry.

Vesting Certificates seem to be becoming more and more popular as the construction industry evolves. We often see them on modular builds and energy & infrastructure projects. Typically, these projects have long lead times and involve high-value materials, where the majority of the cost is incurred before the work is erected on-site or incorporated into the works/building.

Often, materials are purchased well-ahead of the planned installation date to give the contractor time to produce or manufacture the goods and to secure price discounts or delay delivery slots due to long lead times. The contractor would then include these items in an interim payment application to aid cashflow and also to merit their time/investment in commencing and continuing to build. In return, the employer would likely ask for proof of purchase in support of the application and request a Vesting Certificate.  

A Vesting Certificates provides comfort to the employer in return for paying for an item he has not yet received.  An employer will be looking for the following provisions in a vesting certificate:

  • clarification of all involved parties and relevant contracts
  • a list of the relevant materials/goods, and sums to be paid
  • a statement confirming:
  • the materials/goods are intended for inclusion at the project and nothing remains to be done to them before they are so incorporated (i.e. they are finished goods)
  • title to the materials/goods is vested unconditionally and absolutely in the contractor/supplier and on receipt of the relevant sums:
    • they will be free from all incumbrances/charges/liens/retention of title claims (i.e. there is no third party interest in, or right over, them)
    • the contractor can freely pass title to them absolutely (i.e. can provide satisfactory evidence of ownership, and that this is not disputed)
    • title to such materials/goods automatically and irrevocably passes to the employer
  • an obligation on the contractor to securely store the materials/goods (i.e. separately from other materials or goods not intended for incorporation at the project) and adequately protect/preserve them in the factory or storage yard
  • the goods/materials must be clearly marked:
  • property of: [employer] of [address];
  • project destination for use: [address] pursuant to [contract];
  • all necessary steps will be taken to prevent third parties claiming the risk of custody, possession or ownership of these materials/goods that are the property of [employer];
  • nobody shall remove the materials/goods from the factory or storage yard other than according to the [contract]
  • the employer is granted access to stored materials/goods at all reasonable times
  • confirmation that the materials/goods are held at the contractor’s risk (i.e. in terms of security, weatherproofing, handling) and they are adequately insured by the contractor against loss or damage
  • the contractor indemnifies the employer from any legal liability arising from breach of the vesting agreement (i.e. would have to fully compensate the employer in the event of any claims, costs, direct or consequential losses flowing from an event) 
  • if the contractor goes insolvent or the contract is terminated, the employer has a licence to enter the premises, collect the materials/goods and take them to the project or another location (at the contractor’s cost)
  • neither the vesting agreement or payments made by the employer amount to deemed acceptance of the quantity/quality of the materials/goods and nothing in the vesting agreement relieves the contractor/supplier of its responsibility and liabilities under the contract

The Vesting Certificates shortcuts a number of contract terms and re-states them in a clear concise manner to clarify the title and risk in materials held offsite despite them having been paid for.  It is particularly useful in the event of contractor insolvency and contract termination, when the employer wishes to recover goods for which it has already paid but not yet received. It is also an effective way to allow cash to flow to the contractor by providing adequate comfort in title to the employer before the goods have been physically delivered or fully incorporated into the works/building. 

However, careful drafting is key: The case of VVB M&E Group Ltd v Optilan (UK) Ltd highlighted the importance of the exact wording of the vesting certificate.

The facts of the case concerned a sub-subcontract between the sub-contractor VVB M&E Group Ltd (VVB) and the sub-subcontractor Optilan (UK) Ltd (Optilan). Under the sub-subcontract, clause 54 provided that: certain goods would be vested in VVB prior to delivery on site; and that any vesting would be “with a view to securing payment” under clause 60. The vesting certificate itself provided for: “unconditional transfer” of ownership of the goods upon “receipt of the interim payment” specified.

The court found the wording of the vesting certificate ambiguous because the unconditional vesting of title upon a future event contradicted itself and other provisions referencing immediate vesting. It criticised the “ambiguity-generating” brevity of using “receipt” of payment without sufficient detail or explanation.

The court decided in favour of VVB, that the transfer of ownership had occurred and was not conditional on actual payment (as the vesting certificate merely recorded an agreement by VVB to include the specified values in their valuation certificate). This is a clear example of how the drafting of a vesting certificate can have a substantial commercial effect as to who owns the goods at any given time.

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